Economical would prefer to demutualize through an IPO, if forthcoming regulations allow it

Economical has voiced its preference for an initial public offering (IPO) as part of its intention to demutualize, but no final decision will be made absent clear regulations.

Currently, Canada does not have regulations allowing property and casualty mutual insurers to demutualize. The federal government has entered into a public consultation process to help craft new regulations, and has not committed to a timetable as to when this process will be completed.

In the meantime, it would seem that Economical does have a preferred method to demutualize.

“We really want to do an IPO, but unless we know there’s an IPO market there, we can’t commit to that at this point in time,” Karen Gavan, president and CEO of The Economical Insurance Group, said during a question and answer session on June 8 at the Insurance Brokers Association of Ontario (IBAO) Young Brokers Council’s (YBC) 8th Annual Conference in Niagara Falls.

“We need real choice for mutual P&C companies that choose to demutualize,” Gavan said. Demutualization will allow Economical “to protect our financial stability on the same terms as our non-mutual competitors.”

At its annual general meeting in 2011, the company outlined to its mutual policyholders two possible means for demutualizing.

One is an IPO, which would convert mutual policies into shares.

The second is a “sponsored” demutualization, which could involve the sale of parts or all of the company. Investors leaning toward sponsored demutualization may be interested in private equity and pension-type funds, Gavan said.

“That’s a great fallback position for us in the event there is no IPO market,” Gavan said of sponsored demutualization. “We can do that almost as a stop-gap measure for an IPO down the road.”

Gavan emphasized that “we need to know what the final regulations look like before we make that decision.”

Regulations used as part of demutualizing life insurance companies would serve as a good model for property and casualty mutuals, she suggested. “The result of those demutualizations was larger, stronger, more internationally competitive life companies that serve more customers, employed more people and added significant wealth to the Canadian economy.”

In the insurance industry overall, she pointed out the Top 10 players represented 63.5% of the total market in 2010, considerably more than the 46.3% a decade earlier.